Recently, a China Daily news report caught Uncle Sam’s attention, presumably at an inconvenient time: just when the U.S. Senate finally admitted to abandoning its plan of issuing a federal climate bill by the end of this year, top Chinese officials were discussing how to launch carbon trading programs under their country’s next Five-Year Plan (2011–15). Serving as China’s overarching social and economic guidance, Five-Year Plans consistently lay out the most crucial development strategies for this giant emerging economy. Once included in the plan, carbon trading will be viewed as part of China’s national goals and will be domestically binding. This occurred most recently with the country’s 2010 energy intensity target, which called for a 20 percent reduction from 2005 levels and was disaggregated into provincial and local targets, with local officials held accountable for achieving them. In short, China seems to be accelerating full-throttle toward a low-carbon economy.

Chinese policymakers have been eyeing a domestic emission-trading scheme for a while. Last August, Xie Zhenhua, Deputy Director of the National Development and Reform Commission (NDRC), announced that China will launch a pilot carbon trading program in selected regions and/or sectors—basically the same message conveyed in the recent China Daily story. On one hand, this reiteration demonstrates that the Chinese government is seriously considering such a market-based mitigation mechanism; on the other hand, the fact that the program’s status is still in discussion a year later shows that putting cap-and-trade into action might be not be that easy in China either.

Here are some of the problems: A non-voluntary emission-trading system cannot work without a mandatory cap on emissions, either for the economy as a whole or for individual sectors. However, China is currently unlikely to set an absolute emission target because this would contradict its long-standing position at international climate negotiations that industrialized countries have a historic responsibility to take the lead in this area. Most Chinese climate officials and experts agree that China could probably peak its emissions between 2030 and 2035, but huge uncertainties remain.

Moreover, with the current U.S. emissions reduction commitment unsatisfactory to most developing countries, China won’t change its position unless the United States changes its own position first. Unless significant efforts are made on the U.S. end (through a commitment to a more stringent emission reduction target), China will stick to the emission intensity target announced in November 2009 as its international commitment.

In addition, a well-functioning emission-trading system would require sophisticated monitoring, reporting, and verification (MRV) mechanisms. The Chinese government has been making progress in building MRV capacities, but it still lacks transparency in terms of what has been done and how.

Take for example the government’s regularly reported energy intensity data. Not only have annual reduction figures been subject to change in sequential publications—e.g., the 2006 number has already been “corrected” three times—but the reporting procedure has made it difficult to track and verify the underlying calculations. The National Statistic Bureau’s annual report on energy intensity reduction, for instance, reveals only the intensity figure, without showing the deflator used to produce the 2005 base-level GDP, making it impossible to check the pace of the reduction using publicized energy consumption and GDP data. In short, published statistical reports show government numbers but do not reveal how they were calculated.

Finally, a feasible cap-and-trade design would have to consider many details, such as which sectors are covered by the cap, how emission allowances will be distributed, whether there will be price corridors, etc. These design features touch on powerful economic interests. In China, this means that the actual design of the scheme will not be publicized unless the interests of all parties are subtly balanced.

Thus far, most existing Chinese stock exchanges have focused on broad environmental equities such as environmental technologies and emissions of conventional pollutants: companies with new pollution-control technologies can sell them on the exchange, with sulfur dioxide emission allowances being the major tradable pollution equity. Now, several exchanges are preparing for the introduction of carbon dioxide and other greenhouse gas emissions trading. For instance, the Tianjin Climate Exchange is expected to launch a carbon trading scheme by the end of 2010, and Wuhan, the capital of Hubei province, has submitted to the NDRC an application to be the first National Pilot Center for Carbon Trading. Although detailed information is lacking for these initiatives, they demonstrate the government’s serious efforts, at the national as well as provincial and local levels, to try to bring the trading mechanism into reality.

Even if these efforts are successful, the international community needs to keep in mind that China would adopt such a carbon trading scheme strictly in its own interest—that is, to reduce local air pollution, increase energy security, and gain a competitive advantage in the energy markets of the future. In the United States, new energy entrepreneurs have mentioned the same self-interest motivation, as demonstrated recently at the Clean Energy Ministerial Stakeholder meeting (click here to view major U.S. stakeholders’ presentations). However, with a stronger market signal now unlikely for many years because of the delay in comprehensive national climate and energy legislation, the United States might well fall behind China in this new era of global competition over green technologies and services.

It is rather unlikely that China’s pilot carbon trading schemes will lead to an economy-wide emission cap in the near future (they might lead to sectoral national schemes first, and an economy-wide cap later). Meanwhile, several other market-based mitigation options are under serious consideration in China. In a 2009 report, the Ministry of Finance’s Research Center for Fiscal Science (RCFS) proposed introducing a carbon tax in the next five years. While China likely won’t commit to a single mandatory national mitigation mechanism anytime soon, it will be interesting to see how the economic and political interests play out over the coming months and years.